Mutual Funds Likely to Face Major Shakeup: Vanguard

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The global financial crisis will reshape the funds management business in terms of competition, government regulation and investors' taste for products, the chief executive of U.S. asset manager Vanguard Group said.

"There will be profound changes in the way investors look at the world going forward," Bill McNabb told Reuters in a telephone interview on Tuesday.

"We are going to see a return to higher savings rates and much more focus on diversification," McNabb, who took over as CEO in late August, said.

Vanguard is the second-largest U.S. mutual fund firm after Fidelity Investments and manages about $1 trillion in assets.

McNabb's comments come as the plunge in global markets severely erodes assets of fund companies and forcing them to axe thousands of jobs.

Investors and fund firms will focus on "balanced" products, which will not only include stocks and bonds but also alternative assets and cover a global market, McNabb said.

Target-date retirement funds, which automatically adjust allocations between different asset classes depending on the age of an investor, will also see stronger demand, he said.

"They don't insulate you fully from a downturn but they protect you from a dramatic downturn." McNabb saw a rush of takeovers and mergers altering the industry's competitive landscape.

"There will be less independent asset managers a year from now than there are today," he predicted. He said Vanguard, which pioneered index mutual funds in 1976, fared better in the crisis than some of its rivals due to its diversified products and client base.

Vanguard's funds have posted net inflows of $68.9 billion in the first 10 months of 2008 compared with $103.7 billion for the whole of 2007.

Earlier on Tuesday, BlackRock (NYSE: BLK) President Robert Kapito told the Reuters Global Finance Summit the largest publicly traded U.S. asset manager was interested in acquisition opportunities, including in emerging markets.

McNabb, however, said Vanguard would prefer to grow organically and that most mergers don't work due to the differences in cultures of the partners.

He said his own distaste for acquisitions could be due to his stint a quarter of century ago at Chase Manhattan Bank.

"I started my business career undoing bad acquisitions and leveraged-buyouts.

Maybe I am scarred by that experience." The Vanguard chief said a new regulatory authority was needed to coordinate the oversight of the separate but increasingly interconnected segments of financial services such as mutual funds, banks, insurers and others.

"It's an initiative whose time has come." Vanguard's exchange-traded funds (ETFs) collected net inflows of $18.4 billion in the first 10 months of this year, with October alone bringing in $2.8 billion, McNabb said.

By comparison, the fund's ETFs got net inflows of $18 billion for all of 2007.